TDS on Industry Closure Payments: Madras High Court Upholds Exemption Under Section 10(10B) — CIT (TDS) Vs Hindustan Photo Film Workers

Case Background and Context

The Madras High Court recently delivered a significant ruling in CIT (TDS) Vs Hindustan Photo Film Workers, addressing a critical question in the realm of tax deducted at source (TDS) — whether compensation disbursed to workmen following the shutdown of an industrial undertaking qualifies for full exemption from income tax, and under which specific provision of the Income Tax Act, 1961 such exemption would be governed.

The dispute originated from a batch of writ petitions challenging the applicability of TDS on payments made to workers who were beneficiaries of a scheme framed in the context of the closure and winding up of the undertaking. The Revenue authorities sought to classify these payments under Section 10(10C) of the Income Tax Act, 1961, which governs Voluntary Retirement Scheme (VRS) benefits and carries a restricted exemption ceiling. The workmen, on the other hand, argued that the payments were exempt under the second proviso to Section 10(10B), which provides broader protection to workmen receiving compensation under Government-approved special protection schemes.

At the heart of the dispute was a deceptively straightforward issue: does the label attached to a payment scheme determine its tax treatment, or does the true nature and purpose of the payment govern its classification?

The Revenue contended that since the scheme was formally designated as a Voluntary Retirement Scheme, the payments were squarely covered by Section 10(10C), and the exemption available thereunder was the only relief the workmen could legitimately claim. The workmen's union countered that the substance of the scheme — a special compensation package approved by the Central Government to provide relief to workers adversely affected by the closure of the undertaking — placed it firmly within the protective ambit of the second proviso to Section 10(10B).

Winding-Up Proceedings and the Special Package

Winding-up proceedings had been initiated before the Madras High Court, and the Company Court had already passed an order in C.P.No.114 of 2003 dated 24.01.2017, observing that the payment due to workmen was in the nature of a special package, even though it had been styled as a Voluntary Retirement Scheme. The learned Single Judge had recorded the following in paragraph 14 of that order:

"The only apprehension of the workmen appears to be that if the assets of the company in liquidation are taken over by the learned Official Liquidator, then the workmen fear that they may have to stand before the learned Official Liquidator in the queue along with other unsecured creditors to recover the dues and that they should not be put to such an ordeal, more particularly when the Central Government has sanctioned a special package to take care of the workmen opting under the VRS Scheme."

This factual foundation — that a Central Government-sanctioned special package was at the core of the payments — became pivotal to the final determination.

The Single Judge's Findings: Paragraphs 31 and 32

The learned Single Judge examined the issue in considerable depth and returned clear findings in paragraphs 31 and 32 of the impugned order, which the Division Bench extracted and affirmed in full: